Senate Votes to Eliminate SEC’s Controversial Cryptocurrency Custody Policy. This is why everyone hates SAB 121 – DL News

• The SEC’s SAB 121 accounting guidance has infuriated cryptocurrency advocates.
• But why did senators, investors and supporters of the banking sector rail against this proposal?

The Senate on Thursday will vote on a resolution to repeal the Securities and Exchange Commission’s controversial accounting guidelines, which critics say has dissuaded investment banks from offering large-scale cryptocurrency custody.

The block reported apparently there is enough bipartisan support to see the measure passed.

This will satisfy a range of interests – lawmakers, investment banks, cryptocurrency investors and cryptocurrency skeptics – who usually agree on very little.

Everyone would like to see SEC Staff Accounting Bulletin 121, known as SAB 121, canceled, saying the guidelines force banks to treat cryptocurrencies differently from other assets.

“I also think that rewriting the rules for how cryptocurrency custody works is outrageous,” said Sean Tuffy, an expert on banking regulation and an avowed cryptocurrency skeptic. DL News.

So what is SAB 121 and why is there so much ire over an arcane issue of banking compliance?

Losing ETFs

Let’s take a look at ETFs to understand the impact of SAB 121.

ETF issuers pay custodians, often banks, to safeguard the asset underlying the fund.

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BNY Mellon, JPMorgan, and State Street all have large custody operations in the United States.

So why, when it comes to spot Bitcoin ETFs, are none of these names involved? If you look at the funds” prospectsyou’ll see Coinbase, Gemini, BitGo, and Fidelity listed as custodians.

This is due, at least in part, to SAB 121, a “de-facto cryptocurrency custody rule that really put custodians out of business,” Tuffy said.

The SEC published SAB 121 in March 2022. Recommends that any entity that safeguards cryptocurrencies on behalf of others should place them on their balance sheet as if they owned them.

They don’t have to do this with traditional assets like stocks.

Like other too-big-to-fail banks, custodians must hold capital reserves to offset risky items on the balance sheet so they can fund their positions in the event of default.

It’s expensive: the capital they are forced to hold in reserve could be tapped for revenue.

SAB 121 is not clear on how much banks should hold against cryptocurrencies, or whether the SEC would enforce it – it is not a rule per se, but just high-level guidance.

But the uncertainty alone has reportedly deterred a number of large companies, including BNY Mellon, HighwayAND Nasdaq – from entering into this business.

Why is this a problem?

Lawmakers like Republican Mike Flood, who supports anti-SAB Resolution 121, say excluding experienced, heavily regulated banks from the cryptocurrency custody industry puts investors’ assets at risk.

Part of this risk comes from the fact that most of the Bitcoin underlying spot ETFs are concentrated in a single provider. Coinbase handles custody of eight of the 10 ETFs, or about 90% of the Bitcoin in these funds.

“It’s just a really strange situation and a good example of how the SEC has gotten itself into a bit of a knot with its court press against cryptocurrencies.”

—Sean Tuffy

However, this puts SAB 121 directly at odds with SEC Chairman Gary Gensler’s position that existing regulations are adequate to police cryptocurrency markets, Tuffy said.

“If this is true, and I am inclined to believe it, then why would the SEC create very different custody rules for cryptocurrencies?” Tuffy said.

SAB 121 essentially transfers custody of Bitcoin ETFs to Coinbase, which the SEC is actively suing for violations of securities laws.

“It’s just a really strange situation and a good example of how the SEC has gotten itself into a little knot in its court press against cryptocurrencies,” Tuffy said.

Pressure for repeal

Gensler doesn’t seem to want to eliminate SAB 121.

He likely believes this addresses the risks that SEC staff see in cryptocurrency markets, a position strengthened by the huge losses caused by the failures of crypto firms like FTX and Celsius.

But he is under pressure to turn the tables, or at least allow the public to weigh in.

The Government Accountability Office, the oversight body of the American Congress, said in October that SAB 121 constitutes a rule and should be subjected to the public consultation process required by law.

And then there is the powerful lobby of the big banks. Influential trade associations such as the Securities Industry and the Financial Markets Association they requested investment banks will be excluded from SAB 121.

Gensler, however, has the president of the United States Joe Biden in his corner. Biden said he would veto Flood’s resolution if it passed the Senate.

“Limiting the SEC’s ability to maintain a comprehensive and effective financial regulatory framework for crypto-assets would introduce substantial financial instability and market uncertainty.” Biden said.

Contact the author at joanna@dlnews.com.

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